Could you please explain whether it is permissible to engage in the business of buying and selling of shares? If you have a close relative who is engaged in such business, is it permissible to have dinners at his place or accept gifts he brings to you or other members of your family?
I have received a letter from Dr. Umer Chapra, senior economic advisor at the Saudi Arabian Monetary Agency, which I would like to share with my readers as it provides answers to a number of questions that are of considerable interest to many readers. The first thing I would like to say is that I am indebted to Dr. Chapra for taking interest in this page and maintaining contact. It is a mark of conscientious participation in matters of importance to the Muslim community that an expert like him should find time to make such highly useful explanations. The intricacies of modern financial affairs are not easy for an ordinary person to understand. Hence it is important that our brothers who specialize in this field should come to our help with their valuable advice.
Dr. Chapra has explained the reasons why forward trading in shares and commodities is not permissible in Islam. I would like to emphasize here that the important thing to remember in this connection is that this type of business is undertaken for speculation only. No actual possession of the shares or commodities brought or sold ever takes place. [Financial expression is that you buy something which does not exist at a price that you will never pay for a commodity that you will never get and then sell something which you never had at a price you will never receive.] It is all an exchange on paper. But the huge profits and losses that result from it are real indeed. It is a high risk business which Islam does not permit.
On the other hand, there is no harm whatsoever in a person buying shares in a company for investment. Such a person may hold the shares he bought for any period of time hoping that the company will do well in its business so that he will receive good dividends at the end of its business year. He may also decide to sell these shares either because he needs the money or because the sale offers him a reasonable amount of profit, or indeed to avoid an expected loss.
What differentiates the two types of transactions is that the second is an ordinary business deal, while the first is a paper transaction that involves no actual possession of the commodity in question, either by buyer or seller.
We are not forbidden to visit non-Muslims with whom we have friendly relations or to eat at their places or exchange gifts with them, although they may be associating partners with God. In the case of close Muslim relatives whose income may be questionable, we say that unless we are sure that the money is strictly from the proceeds of usury, then there is nothing wrong with maintaining social contact with them including exchanging invitation with them. If you know that the income of a person is wholly or largely derived from usury then do not share his food or eat in his place.
Perhaps it is useful to add that we have been commanded by our religion not to ask about what is not our business. The source of income of any person falls in that category about which we need not ask.
• Shares & debentures: Income from
Companies normally issue to the public shares and debentures, with the aim of collecting funds to be invested in these companies and industries. When a person buys a number of these shares and debentures, he is an owner of a portion of the assets of the relevant company or industry. Every year the company announces dividends which represent shares in the profits made by the company. The dividends differ according to the performance in any particular year. The dividends paid for shares may vary a great deal, whereas the income of the debentures is called 'interest' which is fixed at the time of releasing the debentures to the public. This interest may vary according to the company or industry which issues them. I would like to ask whether the method of giving interest on debentures is the same as the old method of usury? Is it akin to the modern banking system? Is this type of interest or income permissible from the Islamic point of view? Are we, Muslims, allowed to buy such debentures and shares?
As you are well aware, the prohibition of usury is very strict in Islam. Indeed, Allah has booked some of the sternest warnings He demands to abandon all transactions of usury whatsoever, and to seek the return of their principal loans without asking for even the smallest portion over and above that principal. He told them that if they fail to respond to this order of abandoning usury, they should know that they are at war with Allah and with His messenger. Try as we may, we cannot describe, in our own words, the full significance of this warning. If human being is at war with Allah, that war will have only one result. If one resorts to usury in order to make some financial gains, enormous as they may be, he is actually earning that trifling gain at the expense of being at the wrong end of a battle with none other than Allah Himself. Needless to say, the result is absolute ruin for everyone who stands in the camp opposed to Allah.
The companions of the Prophet have explained the practice of usury which was followed in Arabia before the advent of Islam. When a person borrows money from another, they specify a time for repayment. If the borrower cannot settle the loan at the specified time, he goes to the lender and ask him: "Would you agree to postpone settlement and I would pay you an extra sum?" This may happen several times, with each postponement meaning an increase in the amount to be repaid. It is universally agreed by all Muslim scholars, past and present that this type of transaction is usurious and absolutely forbidden.
When you borrow a sum of money from a bank these days, the bank charges interest at a specified rate. The longer it takes you to repay the loan, the greater the total sum of interest you are paying. In this respect there is a great similarity between bank interest and usury as practiced in Arabia. Nevertheless, the interest charged or paid by bank is not exactly the same as usury. This is due to the fact that the bank operates a system of interest which works both ways. A person who deposits money with the bank receives interest on his deposit. When we look carefully at this transaction we find that the depositor is not in the position of a lender; nor is the bank in the position of a borrower. For these similarities, the majority of contemporary scholars subscribe to the view that bank interest is an offshoot of a usurious system and, as such, it is forbidden to Muslims.
A debenture is a sealed bond of a corporation or a company acknowledging sum on which interest is due. It is thus an instrument showing the amount invested in the company, but this investment earns only interest which is declared at the beginning of the transaction. In this respect, it is closely similar to the bank interest which is paid on deposits. Hence, the same verdict applies to them. Thus, we cannot recommend any Muslim to buy any debentures in any industry or company.
Buying shares in companies or industries, or buying 'unit trusts' is perfectly acceptable according to the system explained in the question. Shares earn a portion of the profit which is only declared at the end of the year, on the basis of the company's performance. Thus, the dividends declared may differ a great deal from one year to another. The risk of making very little profit or none at all, or indeed incurring loss is present all the time. What is necessary for a Muslim before he buys any shares is to make sure that the company in which he wants to invest by buying shares does not trade in anything forbidden. Thus, a Muslim may not buy the shares of a finance company which lends money at interest. Nor is he allowed to buy the shares of a brewery or a company that manufactures wines or intoxicating drinks, or tobacco or in a butcher's shop which sells pork. You should buy shares of companies which trade in legitimate articles only.
Some banks have begun to operate invest schemes in which they take on themselves the responsibility of buying and selling shares on behalf of their clients. Such an investment is lawful from the Islamic point of view, if it can be guaranteed that the bank will only trade in the shares of companies whose business is legitimate and acceptable.
• Shares & stocks: Buying & selling
I believed that it is permissible for a Muslim to buy, own and sell shares and stocks. On this basis, I confidently brought some shares in a newly opened bank in my country. Recently, a friend led me to understand that having such shares cannot be permissible because the bank operates usurious transactions. I would be grateful for your view. Perhaps, I should say that I am willing to forgo all rights to these shares.
It is certainly permissible to invest one's money in buying and selling shares, provided that the shares you buy or sell are that of a business that is permissible to operate. Thus, it is perfectly permissible to own shares in a furniture company, an iron and steel corporation, a supermarket, a travel agency, a computer business, etc. The list is endless.
It is not permissible, however, to own shares in a wine company, a brewery, a gambling shop, etc. because all these either sell things that are forbidden or provide services that are also forbidden. That makes any profits earned from such business forbidden to have.
A bank that operates on the capitalist system of finance belongs to this second category, because much of its operations are interest charging. When you buy shares in a bank, you are actually owning a portion of that bank which means you are involved in all its operations. In a way, you are actually helping in all its operation. Therefore, it is forbidden to own shares in a bank where interest is the basis for most of its transactions.
What I have mentioned applies to buying shares in the bank itself, which means that you are a shareholder of the bank. This is different from the service operated by many banks nowadays, where the bank is an agent, buying and selling stocks and shares for customers in different companies. If those companies are engaged in permissible trade and rendering permissible services, then there is nothing wrong with dealing with them. Even this bank operation itself is permissible, because it is simply a service agency. You only need to make sure that the companies in which the bank buys shares for you do some legitimate business.
If your shares are in the bank itself, you simply need to get rid of them. You only need to offer them for sale, and there will be some purchasers to give you the market value for that. It is not in your interest or in the interest of Islam or the Muslim community to forgo the shares in the bank without claiming the price you paid for them, or their market price.